Financial Costs of Climate Change Seriously Underestimated by US Government Calculations

hurricane irene photoJerry Angelica Photography/CC BY-ND 2.0

I'm not really sure economic calculations play much role in how the US government approaches climate change policy, thanks entirely to philosophical obstructionism and corporate lobbying in Congress, but this is nevertheless serious business:

A new study in the Journal of Environmental Studies and Sciences shows that current calculations on the future financial impacts of climate change are being underestimated by the US government somewhere between 2.6 and 12 times.

Report co-author Laurie Johnson from NRDC explains the full economic reasoning in two thorough blogs, but the the gist of it is that the government uses a figure for the damage caused by carbon pollution at $21 per ton of CO2, wheres a more accurate estimate is in the range of $55-266 per ton—and that's for a middle-of-the-road climate scenario, not worst case.

There's no real way to not get a bit wonky on this for a second, but here's how Johnson explains why the discount rate used in US government calculations is inaccurate:

  • An increasingly disrupted climate may hamper economic productivity, causing economic growth rates to deviate below their historical trajectories. If worse-case climate risks materialize, climate change could even reverse economic growth. In that instance, people in the future would be poorer than people today, not wealthier.
  • Private investors (and hence market returns) do not take into account pollution externalities resulting from production, such as the depreciation of natural capital (e.g., loss of natural habitats to development and pollution) and public health damages, or other potentially negative social impacts related to economic production, such as inequality. They therefore tend to overestimate the impact growth has on real social welfare.
  •  A lower discount rate should be used across generations than within generations for another ethical reason. I touched upon this point in the previous section, but it merits special attention. Part of an asset’s return has nothing to do with expected income growth; it’s simply the rate at which people are willing to borrow from their future income in order to consume more today, and how much lenders require to delay the use of their assets by lending it them. Economists call this aspect of the discount rate the “pure rate of time preference.” The problem is that it refers to trade-offs a person is willing to make about her own income, not hers now versus someone else’s later. Apart from being unethical, time preference discounting is illogical for climate change damages: many of the people benefitting from emitting CO2 today are not the same people as those that will be harmed by it in the future.
  • Even if income grows under a changing climate, it is unlikely that the people most harmed by climate change will be the recipients of that growth.
  • Money isn’t everything. Many of the monetized damage estimates in the government’s model (to say nothing of damages not included) do not capture pain and suffering that accompanies climate destruction, or the intrinsic value we attach to nature.

Tags: Carbon Emissions | Global Climate Change | Global Warming Effects


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